Don’t let fear run your money moves

With each wave of market news it can be tempting to feel like you should be doing, well, something with your investments.Kim Parlee speaks with Preet Banerjee, personal finance commentator, about ways to control your emotions in times of market turmoil.

Hello, and welcome to "Money Talks" COVID-19 Daily Bulletin for Friday, April 24. I'm Anthony Okolie. In a few minutes, Kim Parlee will be speaking with Preet Banerjee-- he's a personal financial commentator-- about how to control your emotions in times of market turmoil. But first, a quick wrap of today's market news. The federal government is providing rent relief for small and medium-sized businesses. Rents will be lowered by 75% for April, May, and June. The move is intended to support companies that have been shuttered since the mid-March lockdown.

Meanwhile, small businesses in the US are closer to getting much-needed aid. A massive $484 billion aid package has passed through the House and is now on its way to President Trump for a final signature. That package comes as the US reaches a grim milestone. The death toll from the coronavirus has surpassed 50,000, which is more than a quarter of the deaths recorded worldwide. Finally, some of Canada's biggest names, including Justin Bieber, Ryan Reynolds, and Celine Dion, are uniting for a COVID-19 special event called Stronger Together. The one-hour special takes place Sunday night and will raise funds for food banks across Canada. And that's a wrap of today's headlines. And next, Kim Parlee's conversation with Preet Banerjee.

- Preet, there is so much uncertainty in the markets right now. It's like a roller-coaster-- a very scary, big, nauseating roller-coaster. And I think a lot of people are just, like you know what? I want off. I don't want to deal with this anymore. But you believe that's not really a good move.

- Yeah and you know, it's an interesting analogy-- the roller-coaster-- because if you were on a roller-coaster halfway through the ride, the last thing you'd want to do is to get off that roller-coaster. Eventually, that ride comes to an end. But the other thing that I would suggest to people is to have some perspective as to what your portfolio is looking like compared to the headline news. Because when you tune into the news you see people referencing the Dow, the S&P 500, the TSX.

These are 100% equity indexes. And so that would be the equivalent of having a portfolio that would be 100% exposed to stocks. And many people don't have a portfolio that is that aggressive. So you know, to continue on with the analogy, if you go to an amusement park, you can pick what kind of ride you want to go into when you set up your portfolio. So make sure you're making the right comparison.

But beyond that, if you were to sort of sell and get off that ride right now, then you have the additional task of figuring out when do you get back in. And this is a fairly consistent trap that investors fall into. And what happens is many investors have a tendency to wait one, two years of being able to look back and seeing good returns before they have the confidence to get back in. Of course, they would have missed out on those returns. So that's why the advice to stick to your plan is often the wisest move for a lot of people.

- Tell me-- I'd say what you're saying is people, I think, who watch the markets or talk about investing, they know this. We know that that is the thing that we should not do, yet you've done work where we're hardwired. We're hardwired to react in certain ways. So how do you think we are hardwired? Why are we hardwired that way? And how do we manage that?

- Yeah, great question. And a lot of evolutionary biologists will point out that for more than 99% of our evolution, really all we had to do was figure out how to stay alive until the morning, which is just a series of short term decision. And so we're really good at making knee-jerk reactions based on limited information so that we stay alive until the morning. Now, money is really about trade-offs between something today for something tomorrow. So it's a trade-off for the future, which is a way of making decisions that, from an evolutionary perspective, we're just not hardwired to do.

We're hardwired to stay alive until tomorrow. So we think short term. So that's one of the major reasons why people have a tendency to have that fight or flight response in response to stimulus. And they think that they have to do something. But of course, sticking to the plan is doing something, because that does require resolve. It's just that our emotions tend to get in the way and say, well, no, we need to do something.

And we are twice as sensitive to losses than we are to gains of similar magnitudes. So the emotional response, again, of losing, say, $10 feels twice as painful as finding $10 feels good. So again, the bad news gets amplified in our minds. And so we have that fight or flight response that kicks in.

- Let me ask you about the need to want to do something, because you talk about fight or flight, but it's like when something happens, I want to react. I want to do something. And so how do you manage that?

- Yeah. So there is something called the action bias. And there was a study that looked at professional soccer goalies under penalty kick situations, and what they found was over 90% of the time whenever they faced a penalty kick, they would dive to the left or to the right. And when they studied the trajectory of shots, they found that had they simply stayed in the middle and done nothing, they actually would have stopped more shots. So it's kind of an interesting example.

But there is that tendency, especially under pressure, in the case of the goalkeeper-- a lot of people watching, you're paid a lot of money-- the tendency to want to be seen to be doing something or the tendency to want to do something ourselves. And of course, this can lead to problems because this is what drives our tendency to say, oh, there's bad news about the markets. I should do something. But doing nothing is actually doing something. You are sticking to a disciplined plan that hopefully you set up with an investment policy statement or what's called an IPS.

- Let me ask you-- is there, though, something-- I still want to do something here. I get it. I get what you're saying, but is there something that people can do just to make themselves feel better and feel like they're being responsible about what's going on?

- Yeah, absolutely. So I think what you want to do is try and reframe your perspective from short term to long term. So one of the ways that you can do that is by creating and going to your financial plan and talking about those what-if scenarios with your financial advisor, if you have one. So you could look at things like, well, how does this actually affect our long term plans? And you may find that this is actually somewhat accounted for in your financial plan. Because, again, we know that markets face periods of severe volatility from time to time.

So when your financial plan and investment policy statement were created in the first place, it took that into account. But if you want the confidence of seeing that laid out for you, have your financial advisor run some scenarios and take a look at, OK, so what if we save a little bit more per month? Or how does this affect our retirement date? And what if we changed it and retired six months later? How does it look now? So if you can, again, refocus on the big picture, that can give you a little bit more resolve to stick through and stick to your plan.

- I know that you're a big proponent of this, and I've always believed in you need to have a structure for things and a structure for decisions. And so you talk about it, could be an advisor, if you manage your money, could be your own plan. But it's important-- structures matter right now. And it matters right now having another person to be able to help you navigate through this when you're not feeling as rational.

- Yeah. And I think another analogy to draw is a personal trainer. So when it comes to getting into the shape that you want to be in, most people know what you have to do, right? You have to put down the cookie and go to the gym a couple of times a week, so that's not rocket science. Everyone knows that, they just don't do it. With a personal trainer, they don't necessarily show you a fancy new way of doing a sit-up, they just get you to do the sit-up that you knew you had to do.

And so when it comes to investing, it can be the same. We know that there are periods of volatility from time to time, and historically, the conventional wisdom is if you stick through it and focus on the long term, you'll be OK. But again, it is so hard to do. And so if you have that financial personal trainer there to help you, that can be some of the best value that you get from an advisor is getting you to stick to a plan. Because sometimes, our biggest enemy to our rate of return or our financial plans can be ourselves. And we're all human. So sometimes, having that second opinion or having that check to sort of reaffirm what your plans are to stick to the tried and true can be very valuable.